Could payday lenders return to South Dakota? Feds might open the door

Just a rate cap on payday loans wasn’t enough.

The group of lawmakers who crafted the language in South Dakota’s current restrictions on payday loans, which limit interest rates to 36 percent, knew the industry would try to find ways to work around the rule.

So they included some extra protections in the statute, using language intended to stop non-bank lenders from using any “device, subterfuge or pretense” to circumvent the state’s rate cap.

Lenders have found a way to do just that, partnering with banks to get around similar protections in other states

Now payday loan lenders appear to have the help of federal regulators, and state officials are concerned about how well South Dakota’s statute will hold up.

“We expected that there was going to be some erosion,” said state Sen. Reynold Nesiba, D-Sioux Falls. “This is just such a profitable product for them.”

The new rule being considered by the United States Office of the Comptroller of the Currency would continue to unravel legal precedent that prevents banks from assigning or transferring loans to non-bank lenders.

As a result, payday loan shops and online lenders get a buffer usually granted only to national banks that would allow them to dodge state-imposed interest rate limits.

Rule changes were first proposed by the feds in November, with more slated for this fall, along with support of a similar measure from the Federal Deposit Insurance Corporation. The OCC is currently welcoming public comment on its latest proposal until Sept. 3.

It’s something the members of South Dakotans for Responsible Lending have been following for months. The group, including Nesiba, helped write the 2016 ballot measure that imposed the payday loan rate cap after receiving the support of 76 percent of voters.

Steve Hickey, a former state lawmaker, also helped lead the push to regulate payday lenders in South Dakota. He supported a rate cap after efforts to bring lenders in on the decision-making process backfired in the Legislature, with payday loan companies turning on a bill they helped draft.

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“They’re coming back in through fine print and nobody missed them, that’s the funny thing,” Hickey said.

In this case, the loophole used by lenders uses what’s commonly called a “rent-a-bank” practice, in which online or payday lenders sell high-interest rate loans assigned to them by a bank. That bank doesn’t have to follow any state limits on interest rates, and neither does the loan. And since the payday lender has paperwork to show the loan is actually made by the bank, neither does the payday lender.

National banks qualify for preemption from state lending restrictions under federal law.

The result: Any payday loan operator could set up shop in South Dakota with an agreement with a national bank and sell loans with an interest rate as high as 150 or 200 percent, Nesiba said.

Some of the only legal protection against such practices comes in the form of a 2015 ruling from the U.S. Court of Appeals for the Second Circuit, which declared that non-banks don’t qualify for pre-emptions from interest rate caps.

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The measure proposed by the OCC, called the "true lender" rule, would ensure the bank is considered the lender, even if the loan is sold by a third-party, as long as the bank is named as such.

But the cap limits are good for individual consumers who can easily get stuck in a debt trap and for South Dakota, as many of the residents who rely on government subsidies such as welfare, food assistance and rental assistance were also trying to pay off payday loan debt, Nesiba said.

“What they want is they want to get you in a cycle where you are paying $50 a month forever,” he said.